Refining margins on some petroleum products like petrol, naphtha and fuel oil have turned negative as demand stalls and the world teeters on the brink of a recession. These so-called “negative crack spreads” have huge implications for India, which imports crude oil and exports petroleum products.
Brent crude oil, the international oil benchmark, was trading at $62 a barrel on Thursday. The price of the refined product -- petrol -- was marginally lower at $60 a barrel, while other products like naphtha and fuel oil were priced at $35 a barrel. However, diesel prices were higher at $78 a barrel and kerosene at $83 a barrel.
Since one barrel of oil yields a slate of products, the positive margins on some products have offset the negative margins on others to ensure that overall refining margins have remained in the zero-to-positive terrain.
For instance, in October, margins of state-owned refineries, without accounting for inventory losses, have been around the break-even point. The margins in the July-September quarter were between $2 and $3 a barrel.
“It is touch and go for us in October. Refinery margins are at a break-even point or just a little positive,” said B N Bankapur, director (refineries), Indian Oil Corporation, which operates 40 per cent of India’s total refining capacity.
An Edelweiss report says that as on October 31, Indian refining margins had turned negative. "Simple gross refining margins were at (-) $2.8 a barrel, while complex gross refining margins were at (-) $3.5 a barrel," it said.
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Reliance Industries' (RIL) refinery in Jamnagar, Gujarat, is a complex refinery -- which is capable of processing heavier crude oil -- while the Mumbai refinery of Bharat Petroleum is a simple refinery, which processes low-sulphur crude oil.
The depleting margins are largely attributable to a pile-up of inventory due to waning demand. “It is an incorrect assessment of demand by refiners across the world,” said a New Delhi-based analyst, adding, "this may be reversed in time". India currently has 149 million tonnes per annum (MTPA) of crude oil refining capacity. It plans to increase this capacity by over 60 per cent to 241 MTPA by the end of 2012. Over the last couple of years, the government has been promoting India as a refinery hub and inviting global companies to invest.
Even though no foreign company, other than L N Mittal-promoted Mittal Investments, has as yet invested in the country’s refinery sector, state-owned companies are pumping in over Rs 55,000 crore to set up new refineries and expand existing ones.
Reliance Petroleum, a subsidiary of RIL, is also investing over Rs 25,000 crore in setting up a 29-MTPA refinery next to the RIL refinery in Jamnagar. The two refineries will together be the largest in the world.
Analysts, however, say complex refineries will continue to report positive margins. “The new export-oriented refineries’ margins will definitely be under severe pressure. But they will continue to be positive overall,” said KMPG Advisory’s Executive Director Arvind Mahajan.
Reliance Petroleum’s refinery is scheduled to be commissioned later this year.